for angels

For Angels

Upstart entrepreneurs increasingly dominate the nation’s economy. The life cycle of many new products has become so short that a business can only succeed by reducing its product development phase and accelerating its presence in the global marketplace. In slower times, a business could grow incrementally from region to region, usually from internally generated capital. Nowadays, the demands for rapid growth require outside capital which banks typically are not able to provide. As the institutional venture capital industry continues to focus on later stage and larger investments, the private investor market now provides the major source of seed and start-up capital. However, private investor seed and early stage venture investing is still a relatively young phenomenon.

The vast majority of small businesses—more than 90%—are lifestyle businesses. They tend to have low-paying jobs with few benefits. The most important small businesses—in terms of economic development—are rapid-growth SMEs (small to medium sized enterprises) or “gazelles,” which make up only 4-8% of all small businesses but account for 70-75% of net new jobs. “Gazelles,” as MIT economist David Burch calls them, have survived their earliest stages and are rapidly expanding firms.

Typically, venture capital is not readily available in the smaller amounts that might be appropriate for a very young or early stage company. Therefore, venture capitalists leave a funding gap. The gap exists as to time – during the earliest stages of a start-ups life, which lasts at least a year – and as to capital – for amounts under $2 million. Angel investors, defined by the U.S. Securities Exchange Commission as accredited investors, are commonly identified as those sophisticated enough to fill the funding gaps. Jeffrey Sohl from The Center for Venture Research (CVR) at the University of New Hampshire estimates that Angel Investors provide 86% of the seed and early stage capital to start-ups. Therefore, angels fill the time gap by investing when venture capitalist will not. It is because of this difference in the timing of capital infusion (angels invest in the earliest stages of development) that make angel investing complementary to venture capital investment.

An angel investor or “angel” (known as a business angel in Europe), is an affluent individual who provides capital for a business start-up. The origin of term angel investor can be traced to the beginning of the era of Broadway productions in New York City, where individual investors provided the much-needed capital to finance struggling theatre productions requiring a bit more funding. It defined those individuals who would fight against all odds to put up the high risk and early stage money to launch Broadway shows. As a result, those who invested were considered “angels”. The concept migrated west to Hollywood in connection with the movie industry and ultimately spread north to Silicon Valley, where the term has been associated with the seed stage financing rounds of early-stage, emerging-growth technology companies. Today, the term still identifies those individuals that take risks and invests his or her own money in an entrepreneurial company. This concept differentiates angel investors from early stage, later stage or any stage venture capitalists, who invest other people’s money.